Shap Blog

The Short and Long of the 2015 Sea Freight Market

Like many of you, I just saw The Big Short and was appropriately shocked and sickened by the greed, the fraud, the cynicism, and the strong feeling that history will simply repeat itself in the coming years. And, just to brighten this blog a bit, let me add that I was also amazed that the great majority of stakeholders in the mortgage-backed securities tragedy seemed under-informed, unintelligent, uninspired, and unwilling to even peek at the big picture. Ahhh, it feels so good to stand on this moral high ground wagging my finger at these supposed experts!

Wait a minute. Am I not handsomely paid to predict the ocean shipping market? Are my loyal, intelligent customers not expecting me to guide them through the high seas, windy storms, and treacherous rip tides of steamship policies and politics? Gulp…yes and yes.

So, what on God’s green Earth happened in 2015? How did the grand poohbahs in the shipping press, the fat cats on steamship boardrooms, the crafty supply chain wizards of the Fortune 500, and the know-it-all 3PL prognosticators like myself miss the historic crash of the Trans-Pacific ocean rate market in 2015?

From my seat, we can explain 2015 as the short term effect of a long strategy by the carriers.

Here are six of those trends:

Mega-Vessels

By committing to larger vessels, the carriers are indicating that the lowering of operating costs is king in their business. They seem to have grown weary of accomplishing their financial goals, in the short term at least, by playing rate roulette in what amounts to an irrational market. Call this cynicism or call it wisdom. I call it both!

Demand

Nobody expected Europe to remain weak in the long term, and this has only made it harder for the carriers to delay capacity increases in the Trans-Pacific. The long range strategy for Asia-Europe is the deployment of mega-vessels to reduce costs per unit, but the model breaks down badly when vessels are nowhere near full.

Co-Habitation

Vessel Sharing Agreements (VSAs) and new carrier alliances are aspects of the longer carrier strategies to diminish operational costs and to share risks, but the short term effect is that carriers find it more difficult to change rotations or to remove vessels when decision-making must be more democratic than in the past.

Financial Efficiency

The 2M alliance, which raises the long-term specter of an “oligopoly” of sorts has helped to create short term fear and spending from mid-sized competitors who are all but desperate to create a more cost-effective footprint that will allow them to compete in decades to come.

Energy Efficiency

The global steamship fleet may be under-sized, but it pollutes too much! While the industry is moving quickly to more environmentally friendly and larger vessels, it has been scrapping old boats at historic levels. Oops, that is until 2015 when the global demand for steel plummeted as China dealt with an economy that essentially over-heated in 2015.

The Panama Canal

‘Nuff said. Watch the carriers try to figure in the short term what size vessels and port rotations to configure when the canal will allow for vessels that cannot yet be worked on the U.S. East Coast. The short term effects are nearly schizophrenic.

“The truth is like poetry. And most people hate poetry.”

–The Big Short

Honestly, I am exhausted just from thinking about this. And yes, I feel that all of us over-reacted in 2015 to the market of 2014. The importers greedily routed cargo at more reasonable rates and sane transits in early 2015 and watched their inventories grow. The steamship lines, having fed so very well in 2014, turned to more strategic initiatives in 2015 only to watch the rates erode to levels most of us have never even imagined were possible. The shipping press must be giddy with all the attention they are getting! And, the hard-working and heroic mid-sized 3PLs named Shapiro are scratching our heads a bit but relentlessly seeking some logic and connection between the long game of the next 10 years and the short game coming in 2016.

Please stay tuned and please contribute to this conversation and debate. I would love to hear what y’all think is coming at us in the next 12 months. For my part, I’m not showing you my answer yet. I still need two or three more therapy sessions from 2015.

-- Robert BurdetteVice President, Strategy

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